Basis Period Reform
Posted on 18th July 2023 at 12:29
The basis period for income tax will be changing as from April 2024. The reform will affect unincorporated entities, whereby businesses need to report on profits generated in the tax year instead of in an 'accounting period'. This measure will only affect businesses which draw up annual accounts to a date different to 31 March or 5 April and businesses that commence from 6 April 2024.
The reform measure will affect:
Self-employed traders (including individuals with a profession / vocation)
Partners in trading partnerships
Other unincorporated entities with trading income (including trading trusts / estates and non-resident companies with trading income charged to Income Tax)
Summary of the reform
The basis period reform sets out a new timeline for those unincorporated businesses to report profits. These businesses will therefore use the 'tax year' instead of an 'accounting period / year' as the basis period for income tax, meaning only profits realised within the tax year will be assessed for income tax.
The basis period reform will take effect for the 2024 to 2025 tax year, with a transition year in the 2023 to 2024 tax year.
Transitional Year 2023 -2024
For those businesses with an accounting period / year end that does not align with the 'fiscal tax year', they will need to report on a longer 'basis period' for the 2023/24 tax year, in order to bring all taxpayers up-to-date, in preparation for 'tax year basis' beginning at April 2024. This means profits will need to be apportioned from two accounting periods that fall within the tax year 2023/24.
Take for example, a business with a year end of 31st December 2023, this will be made up of two parts (1st January 2023 - 31st December 2023), plus the transitional period (1st January 2024 - 31st March 2024). Therefore meaning there will be fifteen months of profit which will attract income tax in the 2023/2024 tax return.
During the transitional year, tax bills will be higher for those unincorporated businesses with overlapping periods. HMRC has allowed those taxpayers affected by the overlapping profits to spread them over five years by claiming 'overlap relief'.
♦ Unincorporated businesses that commence partway through the tax year, maybe entitled to overlap relief.
HMRC are developing a new online form which is due to be launched on 29th August 2023, which will allow unincorporated businesses and agents (accountants), to request the available information that HMRC holds on the overlap relief on transition to the 'tax year basis' of taxation from 2023/24, or earlier.
The form maybe used to request information for whichever tax year a change of basis takes place in. For example, a business with an accounting year end outside of the 31st March / 5th April window may decide to align their accounting year with the tax year in 2022/23. If it does not, then it will be moved on to a 'tax year basis' of taxation by default in the transitional year 2023/24. Either way, a transitional profit or loss is likely to be created and overlap relief can be used to off-set any transitional profit.
For help and assistance with changing accounting dates, claiming overlap relief or with finding out more about the legislation, then please do contact us:
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